The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
This is such a wise saying that it might have been coined by Adam Smith or one of the great classical economists. It actually flowed from the pen of Henry Hazlitt, the distinguished U.S. economic journalist and author who died last year aged 98. Hazlitt wrote superbly and deserves immense credit for keeping his head during the middle decades of the century, when nearly all his contemporaries were seduced by socialist ideas and Keynesian economics. Indeed, in his analysis of economic and social problems, he was often decades ahead of his time.
A self-taught polymath, he wrote or edited some 18 books (see The Wisdom of Henry Hazlitt , Foundation for Economic Education, Irvington-on-Hudson, New York 10533). But he is probably best known for his short classic, Economics in One Lesson , which he wrote in 1946, during time off from his job as economics leader writer for The New York Times .
Many economists would dismiss it as a primitive effort. There are no equations or graphs. There is no macroeconomics, because Hazlitt despised “en bloc thinking that assumes away the individual differences that make up reality.” There is nothing about demand management, because he believed in “Say’s Law” — the proposition that in a flexible market economy, supply will create its own demand.
Seemingly anachronistic in its day, the book now looks prescient. Hazlitt grasped the destructive power of special interest groups long before the academic community. The difficulties inherent in economics, he wrote, were “multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests.” He saw that such pleading was a natural result of the division of labour: as individuals we specialise more as producers than consumers.
A steelworker, for example, may benefit from special government concessions for his industry even if these make everybody else poorer. But he will be hurt by every concession granted to their industries. It follows that the only policy that is in everybody’s interests is the apparently hard-nosed doctrine of zero protection in trade and zero subsidies in domestic markets. How much anguish might have been avoided in the postwar years if Hazlitt’s lesson had been thoroughly learned.
The second point he stressed is the need to pay attention to all the consequences of a given policy, especially the long-term consequences. Hazlitt understood the short-run attractions of deficit spending and public works. He knew why decent people favoured minimum wages, rent controls, union privileges and so forth. But he patiently analysed the long-term results of these interventions, showing that they were almost certain to do more harm than good. He worried about incentives, for work, saving and investment, when leading Keynesians dismissed such talk as 19th century claptrap.
Economics in One Lesson was an introductory text. If you want to see Hazlitt at full throttle, read The Failure of the New Economics (Van Nostrand, 1959), a withering line-by-line critique of John Maynard Keynes’s General Theory . Hazlitt is wickedly irreverent, noting at one point: “It is amazing how many fallacies and inversions Keynes can pack in a small space, and especially how many fallacies, like a set of Chinese boxes, he can pack inside other fallacies.” He concludes that none of Keynes’s significant doctrines was both original and true. This will seem a cheap shot only to those who have not sampled Hazlitt’s scholarship.
He sometimes went too far — at least for colleagues. In 1944, Arthur Sulzberger, then running The New York Times , lost patience with Hazlitt’s opposition to the Bretton Woods agreement. “Now, Henry, when 43 governments sign an agreement, I don’t see how The Times can any longer combat this.” Rather than compromise, Hazlitt stopped writing editorials on the subject and later moved to Newsweek as a columnist. Hazlitt regarded the proposed system of fixed but adjustable exchange rates, with only a partial tie to gold via the dollar, as logically flawed and bound, eventually, to collapse in a global inflation. History proved him right, although the Bretton Woods system provided a stable monetary framework for longer than he expected.
He was prescient on numerous other issues. He anticipated Charles Murray’s critique of the U.S. welfare system by more than a decade. He was an early critic of postwar foreign aid, seeing from the start that trade and investment were the keys to third world development.
Hazlitt was worldly enough to recognize that true believers in free markets and minimal government would always be heavily outnumbered by activists proffering instant “solutions” to every social problem. Speaking shortly after Barry Goldwater’s crushing defeat in the 1964 presidential race, he urged yet greater efforts, arguing that members of the libertarian minority “can’t afford to be just as good as the individuals in the majority. If they hope to convert the majority, they have to be much better; and the smaller the minority, the better they have to be. They have to think better. They have to know more. They have to write better.” Nobody could have set a better example.
This article appeared in the June 13, 1994, issue of the Financial Times. Reprinted by permission.